May 19
If your company has lent money to a director or shareholder, and that balance is still outstanding, the tax cost of leaving it overdrawn has gone up. From 6 April 2026, the Section 455 charge on loans to participators in UK close companies rose from 33.75% to 35.75%. The rate sits inside the Corporation Tax framework, but it behaves more like a temporary cash deposit with HMRC, and the change is large enough to matter even on modest balances.
For an Irish close company, the parallel rules under Section 438 TCA 1997 have not changed in the same way, but the cross-border interaction now matters more than it did.
This article is for owner-managed businesses, family companies and any director or shareholder who has drawn money from a company through a loan account rather than through properly declared salary, dividends or expenses. The position is fixable in many cases, but only if you look at it before your year-end rather than after it.
The increase follows the UK Government’s 2025 tax announcements. The dividend ordinary rate rose from 8.75% to 10.75%, and the dividend upper rate rose from 33.75% to 35.75%. Both apply from 6 April 2026. The dividend additional rate remains 39.35%.
The Section 455 charge is linked to the dividend upper rate. When the upper dividend rate moved up by 2 percentage points, the loans to participators charge moved up with it. The Section 455 rate is now 35.75% for loans made or benefits conferred on or after 6 April 2026. It remains 33.75% for loans made between 6 April 2022 and 5 April 2026, and was 32.5% before that.
The change is small in percentage terms and large in cash terms once balances build up. A £100,000 overdrawn loan made on 30 April 2026 attracts £35,750 of Section 455 tax if it remains outstanding beyond the repayment deadline. The same loan made a month earlier would have attracted £33,750. The £2,000 difference is real money sitting with HMRC until the loan is cleared and the reclaim timing rules have run their course.
If you are working through the wider 2026 tax year changes, our piece on HMRC PAYE issues and salary sacrifice pension changes covers the other moving parts on the payroll side.
The Section 455 charge only applies to close companies. Most owner-managed UK companies are close companies, which is why this matters to so many SMEs.
Broadly, a UK company is close if it is controlled by 5 or fewer participators, or by participators who are directors. A participator is generally someone with a share or interest in the company’s capital or income, such as a shareholder or certain loan creditors.
If you are reading this and thinking “that is probably me”, it probably is. Family businesses, single-shareholder limited companies and many incorporated professional services firms fall inside the close company rules.
The same broad concept applies on the Irish side under Section 430 TCA 1997, although the Irish definition and charging rules are structured differently.
For groups thinking about whether to operate 1 company or 2 across the border, our piece on setting up a company in both the UK and Ireland walks through the structural questions that sit upstream of the loan account issue.
The mechanics are deliberately simple, which is part of why people miss them.
When a close company lends money to a participator and the loan is not repaid within 9 months and 1 day after the end of the accounting period in which it was made, the company has to pay Section 455 tax on the outstanding balance. The tax is paid alongside the normal Corporation Tax process for that period, even though it is not ordinary Corporation Tax on profits.
The charge is temporary. Once the loan is repaid, released, written off or otherwise cleared, the company can reclaim the Section 455 tax. The reclaim is not immediate. It is generally available 9 months and 1 day after the end of the accounting period in which the repayment or release happened. In practice, the cash can sit with HMRC for well over a year, even where the underlying loan is later repaid.
If the loan is written off rather than repaid, the participator is normally treated as receiving a distribution where they are also a shareholder. That can create a personal tax bill at dividend rates. The company may still be able to recover Section 455 tax already paid, but the personal tax outcome needs careful planning.
A separate point that catches people out is the anti-avoidance treatment of repayments followed by fresh borrowing. If a repayment is made shortly before the deadline and the director or shareholder borrows again soon afterwards, HMRC may treat the repayment as ineffective for Section 455 relief purposes.
The 2 percentage point increase looks small until you put numbers against it. Here is how the Section 455 charge changes depending on when the loan was made and the size of the balance.
| Loan balance outstanding | Section 455 at 33.75% | Section 455 at 35.75% | Extra cash cost |
|---|---|---|---|
| £10,000 | £3,375 | £3,575 | £200 |
| £25,000 | £8,437.50 | £8,937.50 | £500 |
| £50,000 | £16,875 | £17,875 | £1,000 |
| £100,000 | £33,750 | £35,750 | £2,000 |
| £250,000 | £84,375 | £89,375 | £5,000 |
The extra cost is recoverable when the loan is cleared, subject to the reclaim timing rules. The cash flow hit is not. For a company sitting on a £100,000 overdrawn director loan account with a 31 December year-end, the Section 455 tax is due 9 months and 1 day after the end of that accounting period. That money can be unavailable to the business for a long period.
If cash flow is already tight, our piece on how recovery accountants help improve cash flow covers the wider operational picture, and the key financial KPIs every SME owner should be monitoring monthly sets out what to track to avoid Section 455 surprises.
For loans that span 5 April 2026, the rate applied depends on when each individual advance was made. A £40,000 balance built up from a £25,000 loan in February 2026 and a further £15,000 loan in May 2026 can attract Section 455 at 2 different rates: 33.75% on the older amount and 35.75% on the newer amount.
If the participator later repays part of the balance, the order in which the repayments are matched against the original loans can matter. Where neither the director nor the company clearly specifies which loan is being repaid, repayments may be treated as clearing the oldest advances first. That can leave newer, higher-rate advances outstanding.
This makes record-keeping more important than it has been for several years. If you make and repay loans through the same director loan account, you should now document which advance is being repaid each time. A bookkeeping habit that may not have mattered much at a single rate becomes a tax planning point once 2 rates are in play.
Our pieces on how management accounts help SME owners and switching to cloud accounting for SMEs cover the systems side of getting this right.
A long-standing anti-avoidance rule prevents a director or shareholder from clearing the loan account shortly before the deadline and then drawing it down again immediately afterwards.
Where a repayment of £5,000 or more is made and a new loan or advance of £5,000 or more is taken within 30 days, the rules can match the repayment with the new borrowing and restrict Section 455 relief. There is also a wider arrangements rule for larger balances where there is an intention or arrangement to re-borrow.
In practice, this means you cannot simply clear the loan account each year by short-term borrowing, repay the company on day 1, then draw the same amount back 2 weeks later. HMRC can look at the pattern. The Section 455 charge may stay in place.
The Section 455 charge is one of 2 parallel tax problems on an overdrawn director’s loan account. The other is the benefit in kind that can arise where the loan exceeds £10,000 at any point in the tax year and the director either pays no interest, or pays interest below HMRC’s official rate.
The official rate of interest for beneficial loans is published by HMRC. For 2025/26, the average official rate is 3.75%. The benefit in kind is reported on the director’s P11D, and the company pays Class 1A National Insurance on the benefit value.
None of this changes simply because the Section 455 rate has increased, but it still sits alongside the Section 455 charge and is often overlooked. If you have an overdrawn loan that is being managed through Section 455 planning, the P11D position needs to be reviewed at the same time.
For broader compliance points around payroll and benefits, tax planning for UK businesses expanding overseas and how tax accountants help small businesses both touch on the wider picture.
If you operate on both sides of the border, you cannot simply transplant UK thinking onto an Irish close company.
Under Section 438 of the Taxes Consolidation Act 1997, a loan made by an Irish close company to a participator, or an associate of a participator, can trigger an income tax charge on the company at the standard rate on the grossed-up amount of the loan. The standard rate in Ireland is 20%, which means the charge is equivalent to 25% of the original loan amount. For example, a €10,000 loan is grossed up to €12,500, and the company accounts for €2,500 in tax to Revenue.
The tax can be repaid when the loan is repaid, subject to the Irish rules and timing. There are exclusions, including certain loans made in the ordinary course of a lending business, debts for goods or services on normal trade terms, and some smaller loans to full-time employees who do not have a material interest in the company.
Separately, Irish close companies can also face surcharge rules on certain undistributed income. These are different charges from the Section 438 loan rules, but they often come into focus at the same time during a year-end review.
For cross-border owner-managers, the practical point is that a director or shareholder who is a participator in companies on both sides of the border may have parallel loan accounts attracting parallel charges under different rules. The interaction needs proper handling, which is where good Cross-border tax advisors earn their keep. Our pieces on VAT compliance for businesses operating across the UK to Ireland border and cross-border payroll cover the wider compliance picture for dual-jurisdiction businesses.
The practical playbook is short and unglamorous. If you sit through it before your accounting period ends, you can save real money. If you wait until afterwards, your options shrink.
These are the steps to take:
If you are still on spreadsheets and paper, this exercise is harder than it should be. Our digital bookkeeping service helps owner-managed businesses get the underlying records into a state where a year-end review like this is straightforward rather than painful.
For most owner-managed businesses, an overdrawn director loan account is a manageable administrative point, not a structural problem. It becomes a structural problem when balances run up over multiple years, when the company has no realistic way to clear them, or when HMRC opens an enquiry into the wider position.
The pattern tends to look the same. A director draws living expenses through the loan account because the company cannot afford a salary or dividend. The balance grows. Section 455 tax becomes payable. The company has no cash to pay the Section 455 tax. The position is then both a tax problem and a cash flow problem, and both feed each other.
If you reach that point, the right move is to engage early rather than late. Our corporate restructuring accountants work with directors in this position to map out a route through it, whether that is restructuring the loan position into a longer-term solution, formally writing the loan off and dealing with the personal tax consequences, or in more serious cases, looking at the company’s wider solvency. Our pieces on what an insolvency accountant does in business distress cases and what happens to creditors during company insolvency cover the territory where things have moved beyond ordinary tax planning.
Where there is a dispute between shareholders or directors about loan balances, drawings or the legitimacy of historical entries, the analysis often needs forensic-grade evidence rather than ordinary management accounts. A chartered forensic accountant can rebuild the underlying position from primary records, which is sometimes necessary in shareholder disputes or in defending an HMRC challenge. Our pieces on forensic accounting in shareholder and partnership disputes and what a forensic accountant does and when you need one cover that territory in detail.
Section 455 is one of several moving parts in the current UK tax year. If you are reviewing director loans, it makes sense to look at related items at the same time.
The full list of recent changes worth considering includes:
For deeper context, our pieces on Making Tax Digital explained and Making Tax Digital and what UK and Irish businesses need to know cover the digital filing shift, and our self-assessment tax returns guide covers the personal filing side that matters where dividends are being used to clear loan balances.
For family-owned businesses where the loan account question often sits alongside succession, governance and shareholder dynamics, our piece on protecting the family business with a family charter is worth reading.
The Section 455 rate is 35.75% for loans made or benefits conferred on or after 6 April 2026. It is 33.75% for loans made between 6 April 2022 and 5 April 2026, and was 32.5% before that. The rate that applies depends on when each loan or advance was made.
Section 455 tax is due if the loan remains outstanding 9 months and 1 day after the end of the accounting period in which the loan was made. If the loan is repaid before that date, no Section 455 tax is due on the repaid amount, subject to the anti-avoidance rules on repayments and fresh borrowing.
Yes. Once the loan is repaid, written off or otherwise cleared, the company can reclaim the Section 455 tax. The reclaim is generally available 9 months and 1 day after the end of the accounting period in which the loan was cleared. In practice, the cash can sit with HMRC for well over a year.
A close company is generally a UK-resident company controlled by 5 or fewer participators, or by participators who are directors. Many owner-managed and family companies are close companies. The Irish equivalent under Section 430 TCA 1997 is structured differently but covers many owner-managed Irish companies.
Yes. Where a director’s loan account exceeds £10,000 at any point in the tax year, a benefit in kind can arise unless the director pays interest at or above HMRC’s official rate. The benefit is reported on the P11D and attracts Class 1A National Insurance for the company. The £10,000 threshold is separate from the Section 455 charge.
A loan write-off can trigger personal tax consequences for the director or shareholder. Where the borrower is a shareholder, the amount written off is usually treated as a distribution and taxed at dividend rates. The company may be able to reclaim any Section 455 tax it has paid, but the write-off is not normally a deductible expense for Corporation Tax purposes. The position needs careful planning.
Under Section 438 TCA 1997, an Irish close company can be required to account to Revenue for income tax at the standard rate on the grossed-up amount of the loan. On a €10,000 loan, the grossed-up amount is €12,500 and the tax is €2,500. The mechanics are similar in purpose to Section 455, but the structure and rate are different. There are exclusions, including certain small loans to full-time employees without a material interest.
If you have an overdrawn director’s loan account, the time to do something about it is before your accounting period ends, not after. This is the kind of review our specialist tax team does regularly for owner-managed companies and family businesses, and it can often pay for itself many times over in tax saved, cash flow protected or errors avoided.
As accountants Ireland Northern Ireland and UK businesses rely on for cross-border tax and accounting work, our team can pull the underlying loan position, model the options under the old and new rates, and help you make decisions that fit your wider business and personal tax picture. For broader strategic context, our SME business solutions team and our tax compliance service can sit alongside the specialist work to make sure nothing else is being missed.
Get in touch with the SCC Chartered Accountants team to book a director loan review before your next accounting period closes.
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